Option Investor
Index Wrap

TOPSY TURVY

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THE BOTTOM LINE:
Just when we've gotten used to the broader indices of the S&P 500 (SPX) and especially the Nasdaq Composite (COMP), leading the market, along comes a topsy-turvy move, with the biggest capitalization NYSE stocks and long-time laggard Dow 30 having the strongest rally off from recent lows.

I wasn't convinced that we had seen a major bottom yet(based especially on my Up-Volume indicator showing falling overall buying interest) and was seeing potential for the major indices to remain in a sideways to lower pattern for some time yet with back and forth trading swings. Possibly right in seeing more backing and filling ahead, possibly wrong in thinking that a major bottom wasn't already in place, since the S&P 100 (OEX) and Nasdaq 100 (NDX) formed double bottom lows relative to early-Jan. [COMP bottomed 43 points above its early-Jan. intraday low.]

There was this market 'leadership' question: I was seeing that SPX and COMP had yet to test key prior lows and these BROAD market indexes had been leading the market, making for a tendency to discount the OEX & NDX double bottoms. Important for index trading is to know whether the major trading indexes are in a trading range, like they've been since late-Nov., OR if they are in a renewed uptrend. Stay tuned on that!

The market is not yet 'out of the woods' as far as a renewed 'confirmation' of the major uptrend: SPX is yet to break out to a new 12-month high and COMP has yet to break out above its down trendline, let alone its prior High. Not so for the Dow 30 (INDU), which not only held its Oct-Jan-Feb up trendline, but went on to gave a minor bullish Dow Theory 'confirmation'.

Dow Theory suggests that the Dow Transportation (TRAN) and Dow Industrials should 'confirm' each other to suggest that the dominant trend is still intact. If TRAN goes to a new high, which it did some time ago, INDU should also and it finally did. Not an all-time high, unlike TRAN, but a new closing weekly high for the current move; an advance dating first the 2002 bottom initially and most recently, from the market's prior low of this past Oct.)

So, we have the Dow 30 big caps, institutional fallback favorites (especially in given a shift to a somewhat more defensive market view), leading the market. Better dust off that corner of the monitor where you are displaying the lead DJX puts and calls! This recent move could be a 'solitary walk of the Dow', indicating mostly a narrowly focused advance; time will tell if the rally can broaden out. Specifics with the major index charts below.

MY WEDNESDAY 'TRADER'S CORNER' ARTICLES:
This article is an adjunct or companion piece to my weekend Index Trader, where I do a midweek update on my market outlook in conjunction with an explanation of technical analysis principles and indicators relevant to current/recent market action.

My past week's Trader's Corner article, besides having my usual midweek technical update, was about the use and misuse, of the type of technical indicators known as 'oscillators' which suggest 'overbought' or 'oversold' conditions; e.g., Stochastics, RSI and MACD. This recent (Wednesday, 2/15/06) article can be found in your e-mailed Option Investor Newsletter (OIN) this past Wed. or viewed online at the OIN web site by clicking here.

MARKET NEWS and INFLUENCES:
Closing index prices, a recap of market influences like company news and government releases, are covered in the e-mailed and online Option Investor Newsletter, in the 'Market Wrap' section.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY & HOURLY CHARTS:

As described last week, an S&P 500 (SPX) breakout would occur when the Index pierced its down trendline, a resistance overcome this past Wednesday. The strong possibility for this unfolding was its close right at that line on Tuesday, especially given that the Close was so near intraday highs. Wednesday's intraday low found support at the 21-day moving average. If you wanted to buy S&P calls this was a good indication to do so.

I also talked last time about a close above 1278 setting up a test of the prior rally high around 1288; this is now where the index could now be stalled a bit (see the hourly chart too).

The pivotal test for the S&P will be its ability to follow the Dow to new highs; in SPX this is to move above 1295. I don't have a strong conviction about whether it will achieve this, but there is upside momentum here.

Near SPX support is at 1272, back at the trendline; it's important for SPX to stay above its previously broken up trendline. The Index is getting near an overbought reading according to the RSI. If SPX is going to stay in a 1255-1295 trading range, an overbought RSI may signal another top. Look of course for whether SPX starts faltering around the old highs.

HOURLY:
Some added detail is seen on the hourly chart. It's clear that SPX broke out above its minor downtrend channel after bottoming in the 1255 area and then having a strong rally with successively higher (reaction) lows. To maintain a bullish chart, pullbacks should rebound from and hold at 1278, at the previous 'line' of resistance; prior resistance 'becoming' future support.

A key juncture lies ahead as this market is reaching another short-term overbought condition. Most bullish: SPX pierces 1288, then 1295 in fairly short order. Still bullish: a sideways consolidation where prices don't fall more than 8-10 points and SPX then takes off again. Bearish: a daily close under 1280-1278.

S&P 100 (OEX) INDEX; DAILY & HOURLY CHARTS:
Last week it was apparent that 583 was pivotal resistance and the S&P 100 (OEX) got through this after a strong rally that pierced the 21-day moving average; this key trading average formed resistance before this. The move above the 21-day average signaled the bullish upside follow through that followed.

What now? OEX should stay above 583 if there is going to be a fairly immediate challenge of the prior 589 high. Above the old high the Index could next get to 595, at the upper trading envelope.

OEX is almost back to a 'fully' overbought reading on the RSI; given this, its a question as to whether the Index is going to get to or beyond new highs easily. After the long weekend, the most bullish case is that prices continue higher on or soon after Tuesday, without too much of a pause or much of a pullback.

Bullish 'sentiment' is again rebounding and getting near to a cautionary reading again. However, there is MORE caution, less euphoria, than on the last rally into this same price area, which is more positive about the market's ability to work still higher.

HOURLY CHART:

Key OEX technical support implied by the up trendline, currently intersecting around 578 (and rising over this coming week) comes into view with the hourly chart above; the minor uptrend reverses on a break of this line.

DOW 30 (INDU) AVERAGE; DAILY & HOURLY CHARTS:

The Dow 30 Average (INDU) achieved a decisive upside penetration of very key resistance around 10940-10950. The next move was to above the old high. Upside potential is to 11200, assuming INDU doesn't start retreating back below 11050.

Next important support is back at the prior line of numerous highs at 10940-10950. Pivotal technical support is at the up trendline at 10800. A close under 10800, not reversed the next day, would be a definite bearish development. Next lower support below 10800 is best seen on the hourly chart.

I would note again that both Stochastic lines shown above are into overbought territory above 85, implying at a minimum that the risk is growing for another correction. WHEN this will come is unknown; e.g., a correction develops after a move to 11200.

HOURLY:
Interestingly, the hourly up trendline also intersects in the 10800 area, same as the daily chart up trendline going back months. The cluster of hourly lows in mid to late-January suggests major support around 10670.

The hourly Dow chart above shows a classic price/RSI bearish divergence as the RSI is trending lower, contrary to prices; this is at least a warning to protect long call positions against a near-term downside reversal. Don't delay if INDU starts falling below 11050!

NASDAQ COMPOSITE (COMP) INDEX; DAILY & HOURLY CHARTS:
Key immediate resistance is at the down trendline in the Nasdaq Composite (COMP) currently intersecting at 2292, just under the 2300 level. Next key resistance remains at 2315, at the previous high. The all-time 2333 peak is likely major resistance.

There was good follow though once COMP pierced, then closed above, its 21-day moving average this past Wednesday. It shouldn't have been a surprise to see a jump in stocks the next day after a close so near the intraday high. Where to from here? A look at the hourly chart should be next.

HOURLY:
There is a well-defined down trendline that's even more apparent on the hourly chart. It's hard to predict whether prices are going to bust through. Some of my indicators are showing only limited upside momentum.

2276 looks like immediate pivotal support; whether the Index can stay above the low end of this recent (upside) gap should indicate whether COMP will not start falling from the upper trendline as highlighted below. Major support should be found in the 2230 area.

Just as COMP led the overall market advance for a number of weeks and months, the S&P 100 and Dow may lead in the next phase. COMP could lag for a while as some key Nasdaq stocks continue to correct after getting so richly valued.

NASDAQ 100 (NDX); DAILY CHART:

The rally of this past week in the Nasdaq 100 (NDX) came after formation of an apparent double bottom as the early year low at 1633 was not penetrated. I always take note of potential double bottoms, as it's often either an indication of a final bottom or suggesting at a minimum usually, that prices are back down near the low end of a trading range.

Further rally potential is uncertain however: NDX got up to key technical resistance implied by the down trendline but hasn't pierced this area around 1685. Above 1685, look for significant potential selling interest (resistance) around 1723. Unlike the Composite, NDX hasn't yet pierced its 21-day moving average, so is not even showing that much shift in upside momentum.

The Nas 100 has had a limited rally to date and unlike the NYSE related indices has not had more than a limited rebound to date. That NDX is still within its downtrend is apparent on the daily chart above. The hourly chart below has one slightly more bullish highlight to it.

HOURLY:
On the bearish side, NDX formed a 'line' of resistance right at the top end of a recent downside price gap. The bullish technical note was that prices have managed to pierce the hourly down trendline, but the Index was falling back toward it at week's end. If NDX starts dipping under 1672, it will be back in its month+ downtrend pattern.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
41.4-41.5 is key immediate overhead resistance in the Nasdaq 100 tracking stock (QQQQ). A daily close over 41.5 is needed, coupled with the ability to hold this area on subsequent pullbacks, to suggest upside potential to the 42.4 area.

Support is evident in the 40.30-40.5 area.

Volume remains lackluster. Unlike some of the recent rallies, buyers have backed away from the underlying stocks.

HOURLY:
Just like the NDX, the tracking stock needs to find support pretty quickly to suggest there's going to be follow through to the recent advance. So far the Q's have run into resistance and a lack of enough buying, to carry through resistance at 41.4-41.5.

While QQQQ has not reached what is typically an overbought RSI 'extreme' (at 70) on the 21-hour RSI, this indicator did get as high on its scale as the last time that the stock faltered, back late last month. Stay tuned on what comes next, but it's still a weak/bearish pattern.

Good Trading Success!
& Happy Birthday George, Abe and all great past Presidents!

Please send any technical and Index-related questions to me at Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the subject line; not only for answer, but also for possible use in my coming week's Trader's Corner article. Your emails are appreciated and where I learn what you are thinking or wondering about. Yea!

GUIDE TO MY TRADING GUIDELINES AND SUGGESTIONS
CHART MARKINGS:
1. Technical support/areas of likely buying interest are highlighted with green up arrows.
2. Resistance/areas of likely selling interest: red down arrows.
[Gray up/down arrows: support/resistance levels that got pierced]
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls (or selling puts or other bullish strategies).
4. Price levels where I suggest buying index puts (or, adopting other bearish option strategies).

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I most often favor At (ATM), In (ITM) or only slightly Out of the Money (OTM) strike prices in order not to 'overtrade' my account. Exit or 'stop' points, as well as projected profitable index price targets, are based on my technical analysis of the indexes.

Index Wrap Archives